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1. Change the rewards and penalties 2. Change the number of decision points Pre-commitment Strategies

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The goal is to change the environment as perceived by the elephant. The elephant is 1.Emotional 2.Focused on now 3.Fears loss 1. Change the rewards and penalties Short-term Impulsive Doer Passions Affective/Visceral Hot state Long-term Patient Planner Impartial spectator Deliberative Cold state

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Financial peer groups - ROSCAS ROSCAS (Rotating Savings and Credit Association) a group of individuals who agree to meet for a defined period of time in order to save and borrow together. http://www.youtube.com/watch?v=PyFmlXlsbhQ http://www.youtube.com/watch?v=rC7_OQou6MI&NR=1

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Reducing privacy to add social costs “In a cocaine addiction center…[patients] may write a self-incriminating letter, preferably a letter confessing their drug addiction, deposit the letter with the clinic and submit to a randomized schedule of laboratory tests. If the laboratory finds evidence of cocaine use, the clinic sends the letter to the addressee.” T. Schelling (Harvard), 1992, “Self-Control” in G. Loewenstein and J. Elster (eds.), Choice over Time, New York: Russell Sage, p. 167

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Reducing privacy to add social costs “In Lucien Leuwen, Mademoiselle de Chasteller takes care to see Lucien only in the company of a chaperone, to make it prohibitively costly to give in to her love for him.” J. Elster (Columbia U.), 2000, Ulysses unbound. Cambridge University Press, Cambridge, UK

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Competition Competition creates a social group with standards, goals, and the opportunity to gain or lose social status Competition can motivate goal-oriented self-control.

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Adding visceral rewards to small goal achievements motivates the (short-term focused) elephant Incentivize the immediate behavior you want, not just the long-term outcome Increase the immediate payoff from positive choices

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How did adding an immediate payoff allow Dr. Ariely to be the only patient who consistently took the Interleukin injections? Increase the immediate payoff from positive choices http://www.youtube.com/watch?v= e7q-3aGJ7hQhttp://www.youtube.com/watch?v= e7q-3aGJ7hQ 37:40-40:40

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Application question Suppose you don’t like to write, but you need to finish a 20 page term project. What would be the best factor to monitor? Hours? Words? Pages? What would be a good immediate reward? What would not be a good immediate reward?

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Contingent return of initial pledges “[Agreements where] a designated amount of weight loss is rewarded by return to the client of portions of a refundable money deposit … produced significantly greater losses (approximately 20 pounds) over a ten-week period than did a [comparable] treatment.” G. Wilson (Rutgers U.),1980, “Behavior therapy and the treatment of obesity,” in W. R. Miller (ed.), The Addictive Behaviors, Oxford: Pergamon Press, p. 218

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“The [contract] offered individuals a savings account in which they deposit funds for six months, after which they take a urine test for nicotine and cotinine. If they pass, their money is returned; otherwise, their money is forfeited to a charity of the bank’s choosing… [contract] usage increased the likelihood of smoking cessation by 30 percentage points or more.” X. Giné (World Bank), D Karlan, J Zinman, 2008, Put your money where your butt is: A commitment savings account for smoking cessation, MIMEO, Yale University Contingent return of initial pledges

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Financial motivation: finishing research Richard Thaler once motivated a newly hired colleague, “David,” to finish his PhD dissertation within a year after this colleague was hired Thaler offered the following deal: – David would write Thaler a check for each chapter that needed to be finished. – If the chapter was not finished by the agreed deadline, Thaler would cash the check. “David” finished every chapter on time!

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Financial motivation: losing weight Economists John Romalis and Dean Karlan made a pact: – Each would pay the other $10,000 if they could not lose 30 pounds over a nine-month period – Both met their target – They then utilized the basic idea to keep their weight off for the next four years

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Governments can help Governments may help gambling addicts by requiring – casinos to turn away gamblers who put themselves on a “don’t let me gamble” list – cigarette sellers to check IDs and turn away or heavily tax those who put themselves on a “don’t help me smoke” list

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“‘The problem sets should have been graded. I had no incentive to do them, and as a result did poorly on the exams.’ comment from anonymous teacher evaluation, undergraduate game theory course.” Is this an issue of lack of penalty or timing of penalty? T. O’Donoghue (Cornell) & M. Rabin (UC-Berkeley), “Incentives and self-control”, in Advances in Economics and Econometrics, Theory and Application 9 th World Congress, Volume II, R. Blundell, W. Newey, & T. Persson (eds.), Cambridge, UK: Cambridge University Press.

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College students paid to proofread 3 papers. Lost $1 for each day late Group A: #1 due in 7 days, #2 due in 14 days #3 due in 21 days Group B: Pick your own due dates (with penalties) between now and 21 days. Group C: 3 papers due anytime in 21 days

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College students paid to proofread 3 papers. Lost $1 for each day late Group A: #1 due in 7 days, #2 due in 14 days #3 due in 21 days Group B: Pick your own due dates (with penalties) between now and 21 days. Group C: 3 papers due anytime in 21 days Which group paid the fewest late penalties?

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College students paid to proofread 3 papers. Lost $1 for each day late Group A: #1 due in 7 days, #2 due in 14 days #3 due in 21 days Group B: Pick your own due dates (with penalties) between now and 21 days. Group C: 3 papers due anytime in 21 days Which group found the most errors?

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Adding felt losses – paying with cash “In studies involving genuine transactions of potentially high value we show that willingness-to- pay can be increased when customers are instructed to use a credit card rather than cash. The effect may be large (up to 100%).” D. Prelec (MIT) & D. Simester (MIT), 2001, Always leave home without it: A further investigation of the credit-card effect on willingness to pay. Marketing Letters,12, 5-12,

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Experimental purchase following series of check writing v. series of credit card slip signing D. Soman (U. of Toronto), 2001, Effects of payment mechanism on spending behavior: The role of rehearsal and immediacy of payments. Journal of Consumer Research, 27, 460-474

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Removing felt losses In a study of gym memberships, “Eighty percent of the monthly members would have been better off had they paid per visit for the same number of visits.” But, if the goal was to increase the attendance, could this still be a good strategy? S. Dellavigna (UC-Berkeley) & U. Malmendier (Stanford), 2006, Paying not to go to the gym. American Economic Review, 96, 694-719

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Removing felt losses The Automatic Millionaire: #1 selling business book of 2004 Make savings automatic so that you don’t notice it (payroll deductions, automatic withdraws from checking, mortgage payment, etc.)

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Removing felt losses: Save more tomorrow People commit in advance to allocating a portion of their future salary increases toward retirement savings. “the average saving rates for [Save More Tomorrow] program participants increased from 3.5 percent to 13.6 percent over the course of 40 months.” R. Thaler (University of Chicago), S. Benartzi (UCLA), 2004, Save more tomorrow: Using behavioral economics to increase employee saving. Journal of Political Economy, 112, S164-S186

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Removing felt losses: Tax refund splitting Tax refund splitting is a pre- commitment to put a portion of the tax refund into a savings account In a pilot program “those that did participate saved 236% more than they said they would before hearing about the program” A. Chiou, S. Roe, E. Wozniak, advisor E. Luttmer (Harvard), 2005, An evaluation of tax-refund splitting as an asset-building tool for low-to-middle income individuals. http://www.d2dfund.org/system/files/publications/PAE+R2A2+FINAL.pdf